Does anyone understand Q16’s answer. Basically they say there is no credit risk but I’m getting confused on “who’s who” in the plain vanilla swap. The questions states that the firm is paying variable and receiving fixed amounts. The current market value of the swap is -47,000. Why would there be no current credit risk?
The vignette states: “The current market value of the swap to Galaxy is -47,000”. Since the swap worked against them, they are the party with a liability. Credit risk only arises with someone owes you, not when you owe someone else.
Thanks naples, that helped. Easier than I thought.
Isn’t it the “potential” credit risk? Shouldn’t the CURRENT credit risk be zero even for the counterparty until settlement??
Risa Wrote: ------------------------------------------------------- > Isn’t it the “potential” credit risk? > Shouldn’t the CURRENT credit risk be zero even for > the counterparty until settlement?? No…if you owe someone 47K this second, then that’s their current credit risk. In your scenario, there would be no such thing as current credit risk until the settlement date, which we all know not to be the case.
I think Risa is correct. Anyone else can clarify ?
AMC Wrote: ------------------------------------------------------- > I think Risa is correct. Anyone else can clarify ? Look at the post directly above yours. Not sure how I can make it much clearer.